From support to stimulus?

The caution ‘Drink responsibly’ took on a new meaning this weekend, as pubs and bars reopened for the first time since March with social distancing measures in place. Customers were told to remain a metre apart, order drinks through their phones and not ‘overdo it’. 

The controlled reopening of the hospitality sector reveals just how tricky it is to safely restart the economy. Busy pubs and bars will stimulate the economy but risk a second wave. Yet, if not enough people return, businesses will go bust and more jobs will be lost. 

On Wednesday, chancellor Rishi Sunak is expected to announce a raft of measures to help support businesses, protect jobs and encourage household spending. 

A cut to VAT to temporarily boost the economy could be on the cards, to encourage households to spend the savings they have accumulated over the lockdown period. Former chancellor Sajid Javid has advocated this measure – but with a VAT cut of only 3% costing the Treasury an estimated £21 billion, consumer spending needs to be in full force for this to be effective. 

“A temporary VAT cut could play an important role in a broader mix of policies aimed at boosting output and employment, but only if implemented under the right conditions,” said Peter Levell, Senior Research Economist at the Institute for Fiscal Studies (IFS). “There is little point introducing a VAT cut if continued fear of the virus, or continued social distancing restrictions, mean that firms are unwilling to cut prices or consumers are simply unwilling to spend.”

The chancellor may try to ease conditions for businesses by reducing the level of employer National Insurance contributions, or relaxing the conditions for repaying Coronavirus Business Loans. This could prevent a surge in job losses – which are forecast if no extra stimulus is provided - and give businesses extra cash to invest.

It’s likely that the chancellor will use the Autumn Budget to address government borrowing, which is set to pass £300 billion this year.1 Ultra-low interest rates mean that this is sustainable for the moment, but higher taxes or spending cuts are on the horizon as the government takes steps to reduce the deficit.

Raising Income Tax would increase government revenue, but it would also reduce people’s disposable income and spending power, which could damage recovery if introduced too early. It also means the chancellor would break his party’s manifesto pledges to ringfence Income Tax, National Insurance and VAT – the biggest sources of government revenue. The Treasury may therefore wait to gauge how far the economy has recovered before it introduces measures that would be unpopular with voters.  

“For now, the focus needs to remain on measures that will help secure the recovery, even if that comes at the cost of yet more borrowing in the current financial year,” said Carl Emmerson of the IFS. 

“Once we are through the crisis— and the economy has recovered to near its new normal — we will have much higher debt, alongside, most likely, a still elevated deficit and increased demands for additional spending in areas such as social care. At that point it would not be surprising to see a package of tax-raising measures.”

 
The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances.